The Build Back Better Agenda Boosts Productivity and Long-Term Economic Growth in Numerous Ways

Over the last several decades, the United States has seen growing inequality, subpar growth, and many communities left behind. The United States has performed chronically below its economic potential, underinvested in public goods, and compromised the well-being and future prospects of millions of children by allowing them to grow up in poverty.

President Joe Biden’s Build Back Better agenda is based on the theory and evidence that investing in people and families is the way to build a stronger and more inclusive economy. And it is fully financed by raising taxes on the wealthy and corporations.

Unsurprisingly, opponents of the Biden plan assert that it will hamper long-term growth. Some have cited a recent analysis by the Penn Wharton Budget Model (PWBM) to support their claims. Many problems arise when citing the PWBM analysis, but it’s worth starting with an obvious one: It does not analyze the Biden plan. The PWBM’s findings are driven largely by assumptions embedded in its economic model about the effects of growing deficits, despite the fact that Biden’s plan is fully paid for and reduces deficits over the long term. Moreover, the spending proposals in the PWBM analysis differ significantly from those in the Build Back Better agenda and from those that are under discussion in Congress. Economists who have looked at the real Biden plan agree that Build Back Better would boost productivity, increase long-term growth, and help middle-class Americans.

The PWBM does not analyze the actual Build Back Better agenda and is based on unrealistic assumptions

The PWBM analysis is of a plan that would spend $3.5 trillion over the next 10 years, with only half paid for through revenue increases or budget savings; the assessed plan would increase deficits by $1.7 trillion over the next 10 years. That does not describe President Biden’s plan or the framework currently under negotiation in Congress. As President Biden proposes, the Build Back Better agenda, consisting of his American Jobs Plan and American Families Plan, would be fully paid for over less than 15 years. It would reduce deficits by $1.7 trillion over 20 years.

In August, both houses of Congress approved a budget resolution that sets the stage for the Build Back Better agenda to be enacted through a subsequent reconciliation bill. The budget resolution theoretically allows up to $1.7 trillion of deficit financing, but it also allows for a fully financed bill—and even one that reduces deficits. The PWBM analysis therefore assumes the maximum possible amount of deficit financing under the budget resolution, though congressional leaders have said that is not their intent.

The assumptions about deficit financing play a key role in the PWBM’s findings. The PWBM uses a full-employment, general equilibrium model. This type of model assumes that the economy always operates at potential output; that there is no excess unemployment; and that government deficits “crowd out” private investment. These assumptions bear little resemblance to recent economic history in the United States. According to the Congressional Budget Office (CBO), since 2001, the economy has been below potential output 79 percent of the time and below full employment 68 percent of the time. (There is also reason to believe that the CBO and other mainstream forecasters have consistently underestimated the level of potential output.) Meanwhile, the government is currently borrowing at negative real interest rates, suggesting that current deficits are not crowding out productive private investments. An economic model finding that a hypothetical, deficit-increasing plan would decrease growth in a full-employment economy tells us little about the effects that the tangible, long-run deficit-reducing Biden plan would have in the real world.

The PWBM analysis ignores a range of productivity-boosting and growth-enhancing investments

The PWBM analysis also ignores the ways in which many of the investments in the Build Back Better agenda would boost productivity and increase labor force participation—both factors that would produce stronger economic growth. The PWBM’s analysis categorizes only 13.2 percent of the investments in BBB as “labor productivity boosting.” By doing so, the report ignores growing evidence about a plethora of other investments in BBB that are productivity- and growth-enhancing, including:

• Improved access to medications and other care through lower drug prices and better coverage. This could lead to better health outcomes which, according to the CBO, improve productivity and increase the labor force participation of the nonelderly and some elderly individuals. Furthermore, the International Monetary Fund (IMF) explicitly includes expanded health care as a facilitator of increased labor force participation and productivity. Instead, the PWBM assumes the exact opposite: Health spending will lead to individuals working less.
• Expanding the Child Tax Credit (CTC). Similarly, the PWBM analysis categorizes the extension of the expanded Biden CTC merely as a transfer payment without incorporating the economic research documenting its positive economic impacts in the near and long term. Just last week, 448 economists signed an open letter to House and Senate leaders summarizing research on the CTC and childhood poverty: It showed that such investments improve children’s health from birth through adulthood; boost their educational outcomes including high school completion and college attainment; and reduce mortality and crime. Over the long term, children in low-income families are more likely to be employed and earn more. Though PWBM’s analysis extends to 2050, it only takes into account the near-term fiscal costs of the CTC but not these powerful long-term effects.
• A larger earned income tax credit (EITC) for workers not raising children in their homes. The PWBM accounts for the expansion of the EITC in the Build Back Better agenda as a pure household transfer payment without accounting for its positive impacts on labor supply. Both the IMF and Moody’s Analytics directly point to a more generous EITC as a booster of labor force participation and productivity, disproportionately benefiting low-wage workers.
• Investments in affordable housing. Similar to its treatment of the EITC and CTC, the PWBM analysis again omits the productivity-boosting impacts of investments in public housing. Researchers from Harvard University and even the PWBM’s own Wharton School found that labor misallocation associated with unaffordable housing cost the economy up to 2 percent of GDP. Moody’s Analytics found that housing measures, amongst others, would “support stronger GDP and jobs.”
• Investments to address climate change. The PWBM report does not account for the economic costs of inaction on climate change or, conversely, the positive effects of mitigating it. The National Centers for Environmental Information estimate that the United States experienced at least $98.9 billion in damages from extreme weather events in 2020 alone. Economist Jason Furman has further explained, “The longer you wait [on climate change], the more damage you incur in the economy and the more the cost of addressing it in the future goes up.” Instead, the PWBM report simply lists investments in clean energy under transfer and tax expenditures.

The PWBM analysis also assumes a drag on economic growth from lowering the Medicare eligibility age to 60, claiming, “Lowering the Medicare age to 60 and making the ACA subsidies more generous lower households’ financial risk, so they save and work less.” Regardless, lowering the Medicare age was not in the budget that President Biden submitted to Congress—nor is it currently part of negotiations on the budget reconciliation bill.*

Economists agree that Biden’s plan will boost economic growth

The PWBM report does not assess the Biden plan. Analyses of the actual plan reach far different conclusions than those cited by Biden’s opponents. In a rarity for the economics profession, economists—including 15 Nobel Prize winners and more than 70 economists from across the United States—are in agreement: Biden’s actual economic plan is essential to improving our productive capacity and boosting long-term economic growth.

The IMF projects that the American Jobs Plan and American Families Plan—the two halves of the Build Back Better agenda—would increase GDP by around 1 percent in 2030. They found that unemployment would fall to a low of 3 percent, while labor force participation—which continues to struggle—would return to prepandemic levels by the end of next year.

Furthermore, an analysis by Moody’s Analytics projected similar outcomes to the IMF, finding that the Build Back Better agenda would improve economic growth:

The reconciliation package would provide both a near-term boost to the economy given    the tax cuts in the plan for lower-income individuals and as spending on the various    social programs gears up, and several important long-term economic benefits.

The PWBM report is out of step with growing evidence that Biden’s actual economic plan will build a stronger, more equal economy.

Conclusion

The PWBM report does not analyze the actual Biden economic plan nor does it incorporate the growing evidence that spending on low-income children and families—and improved health care and housing supply—enhance productivity and economic growth. Its model does not account for the growing costs of inaction on climate change or the positive effects of mitigating it.

The PWBM analysis is highly dependent on its modeling assumptions about government debt crowding out private investment, which are subject to question—but also inapposite when it comes to Biden’s proposed plan, which is fully paid for. House Republicans citing the PWBM analysis should understand that if anything, it is an argument for fully financing the package through sufficient revenue increases on the wealthy and corporations.

Rose Khattar is the associate director of rapid response and analysis on the Economic Policy team at the Center for American Progress. Nick Buffie is a policy analyst specializing in federal fiscal policy on the Economic Policy team at the Center.

*Authors’ note: While this column is focused on the ways in which the PWBM analysis excludes the Build Back Better agenda’s positive effects on GDP, it should also be emphasized that GDP is not a comprehensive measure of well-being. If a policy that increases financial security allows workers to retire earlier, reduce hours worked to spend more time with their families, or otherwise provide them more freedom, they would be better off.